Tuesday, January 23, 2018

The California Court of Appeals for the Fourth District recently affirmed an order denying class certification in a declaratory relief action because the plaintiff failed to establish ascertainability, predominance and superiority.

In so ruling, the Appellate Court held that California Code of Civil Procedure section 382 did not have an equivalent to Rule 23(b)(1)(A) or (b)(2) of the Federal Rules of Civil Procedures, and that the federal rule provided less onerous requirements for declaratory or injunctive relief actions than for damages.

In November 2015, the plaintiff filed a complaint alleging that the defendant hospital overcharged for his minor child's emergency room care. The plaintiff alleged that under the hospitals Conditions of Treatment/Admission agreement ("COTA"), which all guarantors of emergency care patients were required to sign, the hospital was authorized to charge "regular rates and terms" regardless of whether a patient was a Medicaid, privately insured, HMO, or self-pay patient.

The plaintiff was a self-pay guarantor of his child's financial. His bill of $9,831.34 was based on "Chargemaster" rates developed by the hospital, which contains thousands of different line items, relating to procedures, services and goods that are either bundled or specific. The Chargemaster and the number of line items on it changes each year.

According to the plaintiff, all patients, regardless of category, were subject to the exact same pricing guarantee to pay "in accordance with the Hospital's regular rates and terms."

However, the plaintiff alleged that each category of patients was charged differently because the Chargemaster was merely a reference point for negotiating contracts and pricing schedules with commercial insurance carriers and non-emergency care patients seeking elective treatment and services. The plaintiff claimed that the pricing terms for the hospital's services were "inherently vague, ambiguous and meaningless."

Because the COTA itself contained no pricing terms for the self-payment payments which were certain or readily identifiable, the plaintiff alleged that he was only required to pay the reasonable value of the hospital services and treatment rendered, not the arbitrary prices in the Chargemaster.

In short, the plaintiff claimed that his bill based on Chargemaster rates were "grossly excessive, unfair, and unreasonable."

The plaintiff brought this action on behalf of himself and a class of persons defined as follows:

The guarantors of all persons who within the last four years, had one or more "eligible patient hospital visits" to [the hospital's] emergency department.

For purposes of this class definition, an "eligible patient hospital visit" was defined as one for which "(1) the patient was billed at the hospital's full Chargemaster rates; (2) there have been no full writeoffs, discounts or adjustments to the full Chargemaster billing under [the hospital's] charity care policies; (3) the bill has not otherwise been waived or written off in full by [the hospital]; and (4) no payments for the hospital visit have been made by other than the guarantor, the patient or the patient's representatives."

The complaint sought the following declarations on behalf of the putative class:

(1) "a declaration . . . with respect to their payment obligations to [the hospital], including a determination of the construction and validity of the financial obligation provision of their [conditions of treatment/admission agreement ('COTA')] with [the hospital], specifically finding that [the hospital's COTA] contains an "open price" term, and does not permit [the hospital] to bill and demand payment from selfpay emergency care patients based upon its Chargemaster rates";

(2) "a declaration that they are liable to [the hospital], under [the COTA], for no more than the reasonable value of the treatment/services provided"; and

(3) "a declaration that [the hospital's] billing practices as they relate to Class members are unfair, unconscionable, and/or unreasonable."

The plaintiff filed a motion for class certification pursuant to Code of Civil Procedures section 382, "the equivalents of Rules 23(b)(1) and/or 23(b)(2) of the Federal Rules of Civil Procedure," or in the alternative, an order certifying a class based on a single issue pursuant to California Rules of Court, rule 3.765(b).

The trial court issued a ruling denying class certification. In so ruling, the trial court determined that based on the facts of this case, the Federal Rules of Civil Procedure did not apply and therefore the analysis must be done under the California rule.

Applying California case law, the trial court held that the (1) the class was not ascertainable because "to identify class members could not be accomplished without unreasonable expense or time"; (2) "common questions of fact do not predominate over individualized questions"; and (3) class certification "would not provide substantial benefits that would render proceeding as a class superior to the alternatives." The trial court also rejected the argument "that an issue should be certified in this case pursuant to [California Rules of Court, rule] 3.765(b)."

The primary issue on appeal was whether California Code of Civil Procedure section 382 required a plaintiff in an action for declaratory relief to establish ascertainability, predominance and superiority as a prerequisite for obtaining class certification.

As you may recall, the authority for class action litigation in California is set forth in Code of Civil Procedure section 382, which provides that "when the question is one of a common or general interest, of many persons, or when the parties are numerous, and it is impracticable to bring them all before the court, one or more may sue or defend for the benefit of all."

Additionally, "[t]he party advocating class treatment must demonstrate the existence of an ascertainable and sufficiently numerous class, a well-defined community of interest, and substantial benefits from certification that render proceeding as a class superior to the alternatives". In turn, "the community of interest requirement embodied three factors: (1) predominant common questions of law or fact; (2) class representatives with claims or defenses typical of the class; and (3) class representatives who can adequately represent the class." Brinker Restaurant Corp. v. Superior Court (2012) 53 Cal.4th 1004, 1021.

Moreover, the proponent of class certification must establish that there are substantial benefits from certification that render proceeding as a class superior to the alternatives. See, e.g., Occidental Land, Inc. v. Superior Court (1976) 18 Cal.3d 355, 360.

In contrast, the Court noted, Rule 23 of the Federal Rules of Civil Procedure does not require that ascertainability, predominance and superiority be established to obtain certification in every type of case. See Fed. R. Civ. P. 23. As set forth in Rule 23, only if a class action is certified under Rule 23(b)(3) is the court required to make a finding similar to the predominance and superiority requirements under California law.

However, the Appellate Court noted that while Rule 23 does not refer to an ascertainability requirement, some federal courts "have held that it is an implicit requirement of class certification." See, e.g., Cole v. City of Memphis (6th Cir. 2016) 839 F.3d 530, 541. On the other hand, the Appellate Court also noted that several federal circuits have held that ascertainability is not required when a class is certified under Rule 23(b)(2). Id., at 542.

The plaintiff argued that the trial court should have applied the requirements in Rule 23(b)(1)(A) or (b)(2), because the complaint merely sought "a declaration as to the meaning of a single Contract provision" which would "interpret a few lines of [the hospital's COTA] on al class wide basis." Therefore, the plaintiff argued that he was not required to establish Rule 23(b)(3) s requirements for ascertainability, predominance and superiority.

Thus, the Appellate Court held that even when the plaintiff sought only declaration or injunctive relief, California case law followed the well-established requirements that require the movant to establish ascertainability, predominance and superiority as a prerequisite for obtaining class certification.

Next, the plaintiff argued that the trial court's ruling that the class was not ascertainable was not supported by substantial evidence.

In opposition to the class certification motion in the trial court, the hospital submitted an extensive declaration from a senior director of revenue cycle. The declaration stated that "each patient account's history ha[d] to be manually evaluated individually to determine whether the rates collected and those that [were] outstanding [were] the full Chargemaster amounts or some other amount."

According to the declaration, this is because each patient may receive different discounts based on his or her unique circumstances. For example, some patients may have insurance cover certain services while other services were not covered, or if an account is sent to collections, the vendor may have authority to provide a discount to encourage payment.

Thus, the declaration concluded that the hospital's billing system cannot determine whether a patient or guarantor fell under the class definition without an individualized inquiry into hundreds of thousands of patient's records.

The plaintiff argued that his class definition was based solely on the hospital 's payment records, and therefore, no individualized review was required. However, he cited no evidentiary support for this argument, and did not explain how the class definition would limit the inquiry with respect to the hospital's electronic database.

Therefore, the Appellate Court held that the declaration provided substantial evidence to support the trial court's finding on ascertainability.

The plaintiff also argued that because his requested relief was limited to a simple contract interpretation question, the trial court was not required to determine the reasonable value of the hospital s services for him or any other class member.

However, in the Appellate Court's view, the trial court must determine whether the Chargemaster rates were reasonable in order to afford relief. For instance, only if the Chargemaster rates did not represent the reasonable value of the hospital's services would there be any merit to the plaintiff's argument that the purported "open price item" in the COTA precluded the hospital from billing at its Chargemaster rates.

Relatedly, to issue a declaration that the hospital's Chargemaster rates were unconscionable, the trial court would be required to consider whether the Chargemaster rates represented the reasonable value of the hospital's services. This created an unmanageable individualized factual inquiry that differs as to each class member and was unsuited to resolution in a class action proceeding.

The plaintiff then argued that interpretation of a form contract entered into by each of the class members was an appropriate subject for class treatment, because the meaning of the form contract was a common issue that predominated in this action.

The Appellate Court disagreed. Because of the specific nature of the declaratory relief in the complaint, resolving this case would require the trial court to do far more than simply interpret terms in the COTA.

In fact, according to the Appellate Court, to issue a declaration that the hospital was not permitted to bill based on its Chargemaster rates and that its billing practices were unconscionable, the trial court would be required to decide whether each and every item on the hospital's Chargemaster represented the reasonable value of its services provided to individual patients in any given year. That determination did not present a common issue on a class wide basis.

For this reason, the Appellate Court held that a class action was not the superior method for resolving this dispute. As discussed above, to determine whether each of the Chargemaster rates received by the class member represented the reasonable value of the hospital's services would require the trial court to examine extensive evidence on the thousands of different services appearing on the Chargemaster, and the different services rendered to individual patient.

Thus, the Appellate Court concluded that it would be much more manageable for the courts and litigants if each person who wished to challenge the reasonableness of a bill based on the Chargemaster rates bring an individual proceeding, where the evidence can be manageably limited to the specific services at issue.

Accordingly, the Appellate Court affirmed the order denying class certification.

Saturday, January 13, 2018

The U.S. Court of Appeals for the Ninth Circuit recently affirmed a trial court's judgment in favor of several lender defendants in a putative TCPA class action, ruling that the defendants could not be vicariously liable under the TCPA for a promoter's text messages because the promoter was either not the defendants' agent or the defendants did not have knowledge concerning material facts about the agent's unlawful activities.

In so ruling, the Ninth Circuit held that mere knowledge that an agent is engaged in an otherwise commonplace marketing activity, such as text message marketing, would not lead a reasonable person to investigate whether the agent was engaging in unlawful activities relating to the text messaging.

As you may recall, the federal Telephone Consumer Protection Act (TCPA) makes it "unlawful for any person within the United States, or any person outside the United States if the recipient is within the United States: (A) to make any call (other than a call made for emergency purposes or made with the prior express consent of the called party) using any automatic telephone dialing system . . . (iii) to any . . . cellular telephone service." 47 U.S.C. § 227(b)(1)(A)(iii).

The Federal Communications Commission (FCC), pursuant to its rulemaking authority under the TCPA, has ruled that "[c]alls placed by an agent of the telemarketer are treated as if the telemarketer itself placed the call," In re Rules & Regulations Implementing the TCPA of 1991, 10 FCC Rcd. 12391, 12397 (1995), and has construed actions under the TCPA "to incorporate federal common law agency principles of vicarious liability," In re Joint Petition Filed by Dish Network, LLC, 28 FCC Rcd. 6574, 6584 (2013).

On December 6, 2011, the plaintiff received an allegedly unwanted marketing text message from the promoter. The promoter had entered into an agreement with a lead generating company to provide leads for three lenders.

The plaintiff did not respond to the promoter's text message or click on the link contained in the text message. Instead, the promoter filed a putative class action against the promoter, the lead generation company, and the three lenders. The plaintiff alleged that the lenders and the lead generation company were vicariously liable under the TCPA for the promoter's text messages.

The trial court granted summary judgment in favor of the lenders and the lead generating company. The trial court rejected the plaintiff's argument that the lenders and the lead generating company had ratified the promoter's texting campaign by accepting leads while knowing that the promoter had used texts to generate those leads. The plaintiff appealed.

On appeal, the plaintiff argued that the lenders and the lead generating company had ratified the promoter's unlawful texting by accepting the benefits of the text messages while unreasonably failing to investigate the promoter's texting methods.

The Ninth Circuit first noted that the FCC had relied on the Restatement (Third) of Agency as the federal common law of agency. And, the Restatement defines "ratification" as "the affirmance of a prior act done by another, whereby the act is given effect as if done by an agent acting with actual authority." Restatement (Third) of Agency § 4.01(1). "Ratification does not occur unless . . . the act is ratifiable as stated in § 4.03." Id. § 4.01(3)(a). An act is ratifiable "if the actor acted or purported to act as an agent on the person's behalf." Id. § 4.03.

The Ninth Circuit also noted that even if a principal ratifies an agent's act, "[t]he principal is not bound by a ratification made without knowledge of material facts about the agent's act unless the principal chose to ratify with awareness that such knowledge was lacking." Id. § 4.01 cmt b.

The Ninth Circuit then rejected the plaintiff's argument that the lenders could be vicariously liable for the promoter's text messages because the promoter had not entered into any contracts with the lenders, had not communicated with the lenders, and did not even know of the lenders involvement prior to the plaintiff's lawsuit.

The Ninth Circuit also affirmed the trial court's rejection of the plaintiff's claims against the lead generating company. The Ninth Circuit found that the plaintiff had not produced any evidence that the lead generating company had actual knowledge that the promoter had sent text messages in violation of the TCPA. In addition, the Ninth Circuit determined that the plaintiff had not offered any basis to infer that the promoter had assumed the risk of lack of knowledge, and did not present any evidence that the lead generating company "had knowledge of facts that would have led a reasonable person to investigate further," but ratified the promoter's acts anyway without investigation. Id. § 4.06 cmt. d.

In so ruling, the Ninth Circuit also rejected the plaintiff's contention that a reasonable person would investigate whether an agent was involved in unlawful activities merely because the agent was engaged in text message marketing.

The U.S. Court of Appeals for the Ninth Circuit recently affirmed a trial court's judgment in favor of several lender defendants in a putative TCPA class action, ruling that the defendants could not be vicariously liable under the TCPA for a promoter's text messages because the promoter was either not the defendants' agent or the defendants did not have knowledge concerning material facts about the agent's unlawful activities.

In so ruling, the Ninth Circuit held that mere knowledge that an agent is engaged in an otherwise commonplace marketing activity, such as text message marketing, would not lead a reasonable person to investigate whether the agent was engaging in unlawful activities relating to the text messaging.

As you may recall, the federal Telephone Consumer Protection Act (TCPA) makes it "unlawful for any person within the United States, or any person outside the United States if the recipient is within the United States: (A) to make any call (other than a call made for emergency purposes or made with the prior express consent of the called party) using any automatic telephone dialing system . . . (iii) to any . . . cellular telephone service." 47 U.S.C. § 227(b)(1)(A)(iii).

The Federal Communications Commission (FCC), pursuant to its rulemaking authority under the TCPA, has ruled that "[c]alls placed by an agent of the telemarketer are treated as if the telemarketer itself placed the call," In re Rules & Regulations Implementing the TCPA of 1991, 10 FCC Rcd. 12391, 12397 (1995), and has construed actions under the TCPA "to incorporate federal common law agency principles of vicarious liability," In re Joint Petition Filed by Dish Network, LLC, 28 FCC Rcd. 6574, 6584 (2013).

On December 6, 2011, the plaintiff received an allegedly unwanted marketing text message from the promoter. The promoter had entered into an agreement with a lead generating company to provide leads for three lenders.

The plaintiff did not respond to the promoter's text message or click on the link contained in the text message. Instead, the promoter filed a putative class action against the promoter, the lead generation company, and the three lenders. The plaintiff alleged that the lenders and the lead generation company were vicariously liable under the TCPA for the promoter's text messages.

The trial court granted summary judgment in favor of the lenders and the lead generating company. The trial court rejected the plaintiff's argument that the lenders and the lead generating company had ratified the promoter's texting campaign by accepting leads while knowing that the promoter had used texts to generate those leads. The plaintiff appealed.

On appeal, the plaintiff argued that the lenders and the lead generating company had ratified the promoter's unlawful texting by accepting the benefits of the text messages while unreasonably failing to investigate the promoter's texting methods.

The Ninth Circuit first noted that the FCC had relied on the Restatement (Third) of Agency as the federal common law of agency. And, the Restatement defines "ratification" as "the affirmance of a prior act done by another, whereby the act is given effect as if done by an agent acting with actual authority." Restatement (Third) of Agency § 4.01(1). "Ratification does not occur unless . . . the act is ratifiable as stated in § 4.03." Id. § 4.01(3)(a). An act is ratifiable "if the actor acted or purported to act as an agent on the person's behalf." Id. § 4.03.

The Ninth Circuit also noted that even if a principal ratifies an agent's act, "[t]he principal is not bound by a ratification made without knowledge of material facts about the agent's act unless the principal chose to ratify with awareness that such knowledge was lacking." Id. § 4.01 cmt b.

The Ninth Circuit then rejected the plaintiff's argument that the lenders could be vicariously liable for the promoter's text messages because the promoter had not entered into any contracts with the lenders, had not communicated with the lenders, and did not even know of the lenders involvement prior to the plaintiff's lawsuit.

The Ninth Circuit also affirmed the trial court's rejection of the plaintiff's claims against the lead generating company. The Ninth Circuit found that the plaintiff had not produced any evidence that the lead generating company had actual knowledge that the promoter had sent text messages in violation of the TCPA. In addition, the Ninth Circuit determined that the plaintiff had not offered any basis to infer that the promoter had assumed the risk of lack of knowledge, and did not present any evidence that the lead generating company "had knowledge of facts that would have led a reasonable person to investigate further," but ratified the promoter's acts anyway without investigation. Id. § 4.06 cmt. d.

In so ruling, the Ninth Circuit also rejected the plaintiff's contention that a reasonable person would investigate whether an agent was involved in unlawful activities merely because the agent was engaged in text message marketing.

Monday, January 8, 2018

Adding to the growing split of authority among California's various state appellate courts, and among various federal courts in California, the Court of Appeal of the State of California, Third Appellate District, recently held that a loan servicer may owe a duty of care to a borrower through application of the "Biakanja" factors, even though its involvement in the loan does not exceed its conventional role.

In so ruling, the Third District "assumed without deciding" that California Civil Code § 2923.6(g) offers an affirmative defense to a negligence claim in loan modification cases where the borrower submits multiple loan modification applications.

As you may recall, in order to determine whether a general duty of care exists, California courts balance the six factors used by the California Supreme Court in Biakanja v. Irving, 49 Cal.2d 647 (1958): (1) the extent to which the transaction was intended to affect the plaintiff, (2) the foreseeability of harm to him, (3) the degree of certainty that the plaintiff suffered injury, (4) the closeness of the connection between the defendants conduct and the injury suffered, (5) the moral blame attached to the defendant s conduct, and (6) the policy of preventing future harm."

In 2001, a borrower (Borrower) obtained a loan secured by a deed of trust to her home (Loan). The deed of trust was later assigned to the defendant servicer (Servicer). In 2010, Borrower was laid off from her job and sought a loan modification from Servicer. In May 2010, Servicer allegedly told Borrower that it "would be unable to assist her unless she was at least three months delinquent in her monthly mortgage payments, and thus in default."

In June 2010, Borrower defaulted on the Loan. On August 1, 2010, Servicer allegedly informed Borrower's agent that Borrower might qualify for a HAMP loan modification.

On August 9, 2010, Servicer sent Borrower a letter approving Borrower's request for a repayment plan. Borrower allegedly believed that she would receive a permanent loan modification upon completion of the repayment plan. Borrower agreed to the repayment plan's terms. After making three payments, Borrower contacted Servicer regarding the loan modification. Servicer told Borrower to continue making payments.

On January 3, 2011, Servicer denied Borrower's application for a HAMP modification for failure to provide necessary documents. Borrower then supposedly spoke with Servicer's representative who stated that Servicer denied Borrower's application because Borrower had failed to submit a statement from the State of California declaring her permanently disabled. Allegedly, the State of California does not issue such a document, and Servicer supposedly "requested [this] nonexistent document to further delay the process and frustrate [Borrower]."

In July 2011, Borrower applied for another HAMP modification. Servicer allegedly requested the same documents over and over again. In particular, Servicer supposedly requested that Borrower produce her entire loan application on two separate occasions, requesting duplicates of other previously submitted documents by fax.

While her second application was pending, Borrower ceased receiving disability insurance and began receiving unemployment insurance. Servicer then allegedly demanded that Borrower submit a new application and supporting documents. In November 2011, Borrower returned to work. Servicer supposedly again demanded additional documents due to the change in circumstances. Borrower allegedly complied with Servicer's demands and submitted the requested documents.

On January 18, 2012, Servicer allegedly denied Borrower's application for a HAMP modification, due to an excessive forbearance amount. Borrower asserted that the forbearance amount would have been significantly less had she been given a permanent loan modification "over a year earlier as had been represented."

On April 6, 2012, one of Servicers representatives allegedly told Borrower that she "was approved for another trial loan modification and that upon completion, [she] would receive a permanent loan modification with a 2% fixed interest rate for five years and a principal reduction." Borrower again submitted the requested documents but never received either a HAMP trial period plan or a permanent loan modification.

Borrower allegedly continued her effort to obtain a loan modification, without success. In December 2012, Borrower filed for bankruptcy protection.

Borrower then filed suit against Servicer for intentional misrepresentation, negligent misrepresentation, breach of contract, promissory estoppel, negligence, intentional infliction of emotional distress, conversion, violations of the Unfair Competition Law and conspiracy. Servicer demurred to – i.e., moved to dismiss -- Borrower's claims. The trial court sustained each of Servicer's demurrers.

On appeal, the Third District Court of Appeal reversed the trial court's dismissal of Borrower's purported negligence claim.

In addressing Borrower's negligence claim, the Third District first acknowledged the general rule that lenders do not owe borrowers a duty of care unless their involvement in a transaction goes beyond their "conventional role as a mere lender of money." However, the Court also pointed out that even when the lender is acting as a conventional lender, the no-duty rule is only a general rule.

The Court of Appeal then noted the split in decisions concerning "whether accepting documents for a loan modification is within the scope of a lender's conventional role as a mere lender of money, or whether, and under what circumstances, it can give rise to a duty of care with respect to the processing of the loan modification application."

As you may recall, a majority of federal district courts have found that a loan servicer does not owe a duty of care to a borrower when it reviews a loan modification application. And, in a recent unpublished opinion, the Ninth Circuit also concluded that a lender does not have a duty to a loan modification applicant when the applicant's "negligence claims are based on allegations of delays in the processing of their loan modifications." Anderson v. Deutsche Bank Nat'l, 649 Fed. App'x 550, 552 (9th Cir. 2016).

In sustaining Servicer's demurrers to Borrower's negligence claim, the trial court had relied on Lueras in holding that "lenders do not have a common law duty of care to offer, consider, or approve a loan modification, to offer foreclosure alternatives, or to handle loans so as to prevent foreclosure."

In Lueras, the Fourth District Court of Appeal reasoned that "a loan modification is the renegotiation of loan terms, which falls squarely within the scope of a lending institution's conventional role as a lender of money." The Lueras court then found that the Biakanja factors weighed against finding a duty of care, and it explained: "If the modification was necessary due to the borrower's inability to repay the Loan, the borrower's harm, suffered from denial of a loan modification, would not be closely connected to the lender's conduct. If the lender did not place the borrower in a position creating a need for a loan modification, then no moral blame would be attached to the lender's conduct."

The Court of Appeal disagreed with the trial court, and found Alvarez to be the better reasoned ruling.

The Court of Appeal looked to Meixner v. Wells Fargo Bank, N.A., 101 F.Supp.3d 938 (E.D. Cal. 2015) where the federal district court reasoned: "Alvarez identified an important distinction not addressed by the Lueras reasoning 'that the relationship differs between the lender and borrower at the time the borrower first obtained a loan versus the time the loan is modified. The parties are no longer in an arm's length transaction and thus should not be treated as such. While a loan modification is traditional lending, the parties are now in an established relationship. This relationship vastly differs from the one which exists when a borrower is seeking a loan from a lender because the borrower may seek a different lender if he does not like the terms of the loan."

The Third District then applied the Biakanja factors to Borrower's negligence claim.

As to the first factor -- "the extent to which the transaction was intended to affect the plaintiff" -- the Court of Appeal found that the loan modification was intended to affect Borrower because the Servicer's decision on Borrower's application for a modification plan would likely determine whether or not Borrower could keep her house. The Court concluded the first factor weighed in favor of finding a duty of care.

As to the second factor – "the foreseeability of harm to the plaintiff" -- the Third District held that the potential harm to borrower was readily foreseeable because the alleged mishandling of the documents deprived Plaintiff of the possibility of obtaining the requested relief, even though there was no guarantee that the modification would be granted had the application been properly processed. The Court of Appeal also pointed out that Servicer increased the likelihood that Borrower would incur additional expenses of default during the lengthy loan modification process, thereby increasing the foreseeable potential harm. The Court concluded the second factor weighed in favor of finding a duty of care.

As to the third factor – "the degree of certainty that the plaintiff suffered injury" -- the Court of Appeal found that Borrower's alleged damage to credit, increased interest and arrears, and foregone opportunities to pursue unspecified other remedies constituted a sufficient injury and weighed in favor of finding a duty of care.

As to the fourth factor – "the closeness of the connection between the defendant's conduct and the injury suffered" -- the Third District noted that Borrower's default was imminent which could indicate that Borrower would have suffered damage to her credit and increased interest and arrears regardless of Servicer's conduct. However, the Court of Appeal also recognized that Borrower was current on the Loan until she learned that she could not be considered for a loan modification unless she defaulted. The Court of Appeal then concluded that the fourth Biakanja factor weighed in favor of finding a duty of care at the pleading stage.

As to the fifth factor – "the moral blame attached to the defendant's conduct" -- the Third District reasoned that a borrower's lack of bargaining power, coupled with the servicer's alleged incentive to unnecessarily prolong the loan modification process, "provide a moral imperative that those with the controlling hand be required to exercise reasonable care in their dealings with borrowers seeking a loan modification." The Court of Appeal also noted that the "the moral blame attached to the defendant's conduct" is heightened when the defendant first induces a borrower to take a vulnerable position by defaulting and then subjects the borrower's loan application to a review process that does not meet the standard of ordinary care." The Court of Appeal found that the fifth Biakanja factor weighed in favor of a finding that Servicer owed a duty of care to Borrower

As to the sixth and last factor – "the policy of preventing future harm" -- the Court of Appeal found imposing a duty of care on Servicer would advance the policy of preventing future harm. The Third District noted that California's Homeowner's Bill of Rights demonstrates a rising trend to require lenders to deal reasonably with borrowers in default to try to effectuate a workable loan modification.

Notably, the Court of Appeal's application of the Biakanja factors signifies a reversal from its recent decision in Conroy v. Wells Fargo Bank, N.A., 13 Cal.App.5th 1012. There, the Third District had held that where there is privity of contract, a duty of care does not lie in the mortgage loan context. The Third District later vacated and de-published Conroy.

Notwithstanding its finding that Servicer owed Borrower a duty of care, the Court of Appeal did suggest that Servicer might have an affirmative defense to Borrower's negligence claim. In particular, the Third District "assumed without deciding" that California Civil Code § 2923.6(g) offers an affirmative defense to a negligence claim in loan modification cases where the borrower submits multiple loan modification applications.

As you may recall, section 2923.6(g) provides: "[T]he mortgage servicer shall not be obligated to evaluate applications from borrowers who have already been evaluated or afforded a fair opportunity to be evaluated for a first lien loan modification", unless there has been a material change in the borrower s financial circumstances since the date of the borrower's previous application and that change is documented by the borrower and submitted to the mortgage servicer."

Nevertheless, the Court of Appeal found that Servicer's potential defense based upon Borrower's multiple loan modification applications was not appropriate on demurrer as it required an analysis of facts outside of Borrower's Complaint.

The Third District did affirm the trial court's dismissal of Borrower's purported conversion claim. There, Borrower alleged that a 2006 assignment of the Deed of Trust was invalid due to defects in the securitization process. As a result, Borrower alleged that the later assignment of the Deed of Trust to Servicer was invalid.

The Court of Appeal found that Borrower had not alleged that the Deed of Trust was securitized or assigned to a Trust in 2006. As a result, the Court of Appeal affirmed the trial court's dismissal of Borrower's purported claim for conversion.

In an unpublished portion of its opinion, the Third District: 1) reversed the trial court's dismissal of Borrower s unfair competition claim; 2) affirmed the trial court's dismissal of Borrower's purported claims for intentional misrepresentation and promissory estoppel, but concluded that Borrower should have been given leave to amend; and, 3) affirmed the trial court's dismissal, without leave to amend, of Borrower's purported claims for negligent misrepresentation, breach of contract, and intentional infliction of emotional distress.

As you may recall, California's Unfair Competition Law (UCL) prohibits, and provides civil remedies for, unfair competition, which it defines as any unlawful, unfair, or fraudulent business act or practice. To plead standing, a UCL plaintiff must (1) establish a loss or deprivation of money or property sufficient to qualify as injury in fact (i.e., economic injury) and (2) show that that economic injury was the result of the unfair business practice.

With respect to Borrower's purported claim for violation of the UCL, the Court of Appeal found that Borrower had standing based upon the postage fees which Borrower allegedly spent repeatedly re-submitting documents to Servicer. The Court of Appeal held that these fees constituted "sufficient economic harm as a result of the alleged mishandling of her loan modification application materials."

The Third District also found that Borrower adequately alleged both unfair and fraudulent practices by alleging that Servicer "intentionally delayed the application process by demanding that [Borrower] submit the same documents over and over again, all in an attempt to increase arrears, penalties, and fees, resulting in an incurable default."

The Court of Appeal also reversed the trial court's refusal to grant Borrower leave to amend her purported promissory estoppel claim based upon Servicer's alleged 2012 oral promise to grant a trial plan and permanent modification.

In California, promissory estoppel requires: (1) a promise that is clear and unambiguous in its terms, (2) reliance by the party to whom the promise is made, (3) the reliance must be reasonable and foreseeable, and (4) the party asserting the estoppel must be injured by his or her reliance.

The Third District acknowledge that Borrower failed to allege either an unambiguous promise or reasonable reliance because a general promise to send some sort of trial loan modification agreement does not constitute a clear and unambiguous promise to provide any kind of mortgage relief. And, the Court reasoned that no borrower could reasonably rely on an alleged promise to offer a loan modification on any terms, as the offered modification might not lower their monthly payments sufficiently to allow her to avoid default.

Nevertheless, the Third District held that Borrower should have been given leave to amend to state a viable cause of action, if she is able to do so.

Likewise, the Court of Appeal also reversed the trial court's dismissal of Borrower's intentional misrepresentation claim, based upon an alleged 2012 oral representation that Servicer would send Borrower a HAMP TPP. The Court held that the trial court should have given Borrower leave to amend.

In particular, the Third District found that Borrower had adequately alleged that Servicer's representative made this promise without any intention of performing it, with the intent to induce Borrower to submit another application, thereby prolonging the loan modification process and allowing Servicer to charge additional interest, fees, and penalties.

However, the Court of Appeal acknowledged that Borrower had failed to adequately allege damages based upon her reliance on the supposed misrepresentation. Instead, Borrower opaquely alleged that she might have pursued unspecified "alternate remedies" had she not relied on the false promise that she would receive a HAMP TPP. Borrower also alleged that she suffered damage to her credit and increased arrears, fees, and penalties, while awaiting a loan modification.

The Third District observed that Borrower's Complaint suggested that Borrower had no alternative remedies, due to her poor finances. And, the Court of Appeal noted that Borrower had not alleged how Servicer's representations could have caused her damages, as opposed to her default on the Loan. Nevertheless, the Court of Appeal determined that Borrower should have been given leave to explain her damages and overcome her pleadings deficiencies.

The Court of Appeal did affirm the trial court's dismissal of Borrower's purported negligent misrepresentation claim. The Court found that Borrower had merely alleged that Servicer negligently promised to modify her Loan. And, California does not recognize a cause of action for negligent false promise.

The Third District also found that Borrower failed to allege that Servicer agreed to modify her Loan. The Court noted that Borrowers alleged agreement to provide a TPP on terms to be specified in the future amounts to an unenforceable "agreement to agree."

As you may recall, in order to state a claim for IIED, a plaintiff must allege: (1) extreme and outrageous conduct by the defendant with the intention of causing, or reckless disregard of the probability of causing, emotional distress; (2) the plaintiff s suffering severe or extreme emotional distress; and (3) actual and proximate causation of the emotional distress by the defendant's outrageous conduct.

The Court of Appeal found that the alleged mishandling of Borrower's loan modification applications did not constitute conduct so extreme, outrageous, or outside the bounds of civilized society as to support a cause of action for intentional infliction of emotional distress.

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